Thursday, July 26, 2012

In the 1996
Telecommunications Act Congress charged the FCC to administer the Universal
Service Fund (USF) in a fiscally responsible manner. But the multi-billion
dollar subsidy program is oversized and inefficient. And for consumers, the
program is a costly burden. The system's heavy tab is stuck to consumers in the
form of USF surcharges or de facto
taxes tacked onto their monthly phone bills.

To its credit, the FCC,
under Chairman Julius Genachowski's leadership, finally set about reforming
things in its November 2011 USF
Reform Order. The agency's comprehensive reform plans are intended to
modernize USF and to inject some fiscal responsibility into the subsidy program.
These new reforms offer a path forward for imposing limits on the program's
size, curbing its waste and inefficiencies, and relieving consumers from
burdensome surcharges or taxes.

The FCC's USF reforms
deserve support and must be allowed to continue their course. This means
resisting anti-reformer efforts to roadblock changes to the system. In order to
have any hope of limiting subsidy spending, curbing waste, and giving financial
relief to consumers, it is critical that these reforms be implemented without
delay.

Over the years USF subsidies have snowballed, with annual
subsidy distributions now surpassing $8 billion annually. As FCC Commissioner
Robert McDowell has pointed out, "USF is
larger than the annual revenues of Major League Baseball." Subsidies
directed to carriers serving high-cost areas have increased in size from $2.6
billion in 2001 and to $4.5 billion in 2011.

In many cases, USF subsidies
to rural carriers lack accountability. For instance, subsidies have been
directed to multiple carriers serving the same geographic area. Studies
indicate that dollars distributed to carriers for purposes of network upgrades,
investment, and rate reduction have instead been directed to administrative
expenses. And subsidies reimbursing capital and operating costs have failed to incentivize
carriers to control capital expenditures or operate more efficiently. Despite
these problems, snowballing subsidy dollars continue to roll to carriers with
little discernible benefits for consumers.

But consumers are the ones
facing the avalanche of USF surcharges that are, in effect, USF taxes. As I
explained in a September 2011 blog post, "New
USF Tax Hike Adds Urgency to Reform Effort,"
the rise in USF subsidy distributions corresponds with the rise in
forced USF contributions from consumers. Consumers' monthly phone bills contain
a USF surcharge or tax line item amount. And that amount has grown over the
years. The surcharge or tax rate based on the long-distance portion of
consumers' bills, for example, has risen from just over 6% in 2001 to nearly
16% today. (See chart below.) This growing USF surcharge or tax burden suggests
that the system lost sight of those consumers who it ultimately intended to
serve.

Finally, after years of
kicking the can down the road, the FCC's 2011 USF Reform Order adopted a framework for modernizing and disciplining
the system. Those reforms include a first-time budget to govern USF's "high-cost"
fund and keep costs under control. The agency eliminated its identical support
rule to stop duplicate subsidies to carriers serving the same areas. The FCC also
established new rules regarding rate-of-return carriers serving high-cost
areas, including a $250-per-line subsidy limit. And in transitioning to a
broadband-centric world, the FCC is turning to market mechanisms. It plans to
conduct reverse auctions for allocating support for service to certain
high-cost areas. Many of these reforms will be phased in over time. And the FCC
set up a waiver process to accommodate carriers demonstrating special hardship
under the new rules.

These reform efforts are now
being attacked from those bent on preserving the status quo. This shouldn't be surprising, but it is
nevertheless disappointing. Huge amounts of money are at stake for carriers that
have become reliant on annual subsidies. For example, the USF Reform Order points out that "[r]ate-of-return
carriers’ total support from the high-cost fund is approaching $2 billion
annually." In proposing its reforms, the FCC observed that USF subsidy
mechanisms often gave carriers little to no incentive to improve operating
efficiencies. Similarly, we should expect that carriers will have little to no
incentive to see their subsidy amounts limited through reforms.

Moreover, attacks on USF reforms are
far from compelling when those reforms are put into proper perspective. On the
whole, the FCC's USF reforms are decidedly moderate. However important the
nature of the FCC's USF reforms and however comprehensive their scope, the
reforms stress stability and continuity. The FCC's USF Reform Order is not a slash-and-burn operation. The
framework it sets out is primarily directed to sustaining existing levels of
support while repurposing that support to reflect the technological and
marketplace realities of wireless and broadband. In its USF Reform Order the FCC even stated that "[w]e
expect rate-of-return carriers will receive approximately $2 billion per year
in total high-cost universal service support under our budget through
2017." And as mentioned, many of the FCC's reforms are phased in.

At the Free
State Foundation, we have advocated a more sweeping overhaul of USF. This
includes placing hard caps on its high-cost fund and lowering those caps each
year to ensure serious reductions in the size of the fund. In addition, we
believe the FCC should establish a date-certain timeframe for sunsetting all
high-cost subsidies to carriers. In our view, the FCC should transition USF to a
model that provides subsidies directly to consumers most in need, not carriers.
The Lifeline program for low-income consumers offers an example of how
subsidies can be targeted to intended beneficiaries.

Instead of
being attacked for destabilizing an overgrown, inefficient, and financially
costly subsidy system, the FCC's USF reforms can be more justly criticized for
not being reform-minded enough. Even so, the modest reforms that the FCC is
advancing should provide a vantage point for reassessing USF's future direction
as those reforms are implemented.

However far
the FCC's USF reforms may be from the ideal world, the changes that the FCC has
adopted deserve credit in the real world. Amidst enormous lobbying pressures,
the agency has made significant strides in the direction of improving the USF
regime. The USF Reform Order and the FCC's efforts to implement it are worth defending. And
to ensure the ultimate success of USF reform, Congress and the FCC must see
this current reform process through without interruption or delay.